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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2017

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____ to _____



 



 



 

Commission file number 000-08408

WOODWARD, INC.

(Exact name of registrant as specified in its charter)



Delaware

 

36-1984010



(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



1081 Woodward Way, Fort Collins, Colorado

 

80524



(Address of principal executive offices)

 

(Zip Code)

(970) 482-5811

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 

Yes     No 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer     Accelerated filer    Non-accelerated filer    Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No

As of January 18, 2018,  61,272,503 shares of the registrant’s common stock with a par value of $0.001455 per share were outstanding.

 

 


 









 

 

TABLE OF CONTENTS



 

Page

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements



Condensed Consolidated Statements of Earnings



Condensed Consolidated Statements of Comprehensive Earnings



Condensed Consolidated Balance Sheets



Condensed Consolidated Statements of Cash Flows



Condensed Consolidated Statements of Stockholders’ Equity



Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

27 



Forward Looking Statements

27 



Overview

29 



Results of Operations

30 



Liquidity and Capital Resources

34 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

37 

Item 4.

Controls and Procedures

38 

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

38 

Item 1A.

Risk Factors

38 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39 

Item 6.

Exhibits

39 



Signatures

41 

1

 


 

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except per share amounts)

(Unaudited)









 

 

 

 

 



 

 

 

 

 



Three-Months Ended



December 31,



2017

 

2016



 

 

 

 

 

Net sales

$

470,148 

 

$

442,894 

Costs and expenses:

 

 

 

 

 

    Cost of goods sold

 

346,784 

 

 

329,148 

    Selling, general and administrative expenses

 

46,276 

 

 

38,300 

    Research and development costs

 

34,786 

 

 

26,540 

    Interest expense

 

6,750 

 

 

6,840 

    Interest income

 

(363)

 

 

(405)

    Other (income) expense, net (Note 16)

 

(1,572)

 

 

(4,588)

Total costs and expenses

 

432,661 

 

 

395,835 

Earnings before income taxes

 

37,487 

 

 

47,059 

Income tax expense

 

19,227 

 

 

511 

Net earnings

$

18,260 

 

$

46,548 



 

 

 

 

 

Earnings per share (Note 3):

 

 

 

 

 

Basic earnings per share

$

0.30 

 

$

0.76 

Diluted earnings per share

$

0.29 

 

$

0.73 



 

 

 

 

 

Weighted Average Common Shares Outstanding (Note 3):

 

 

 

 

 

Basic

 

61,246 

 

 

61,559 

Diluted

 

63,709 

 

 

63,671 

Cash dividends per share paid to Woodward common stockholders

$

0.125 

 

$

0.110 





See accompanying Notes to Condensed Consolidated Financial Statements

2

 


 



WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE EARNINGS

(In thousands)

(Unaudited)





































 

 

 

 

 



 

 

 

 

 



Three-Months Ended



December 31,



2017

 

2016



 

 

 

 

 

Net earnings

$

18,260 

 

$

46,548 



 

 

 

 

 

Other comprehensive earnings:

 

 

 

 

 

Foreign currency translation adjustments

 

5,103 

 

 

(18,635)

Net (loss) gain on foreign currency transactions designated as hedges of net
investments in foreign subsidiaries (Note 6)

 

(743)

 

 

3,830 

Taxes on changes in foreign currency translation adjustments

 

187 

 

 

(306)

Foreign currency translation and transactions adjustments, net of tax

 

4,547 

 

 

(15,111)



 

 

 

 

 

Reclassification of net realized gains on derivatives to earnings (Note 6)

 

(18)

 

 

(18)

Taxes on changes in derivative transactions

 

 

 

Derivative adjustments, net of tax

 

(11)

 

 

(11)



 

 

 

 

 

Curtailment of postretirement benefit plan arising during the period

 

59 

 

 

 -

Amortization of pension and other postretirement plan:

 

 

 

 

 

Net prior service cost

 

137 

 

 

56 

Net loss

 

246 

 

 

641 

Foreign currency exchange rate changes on pension and other postretirement

benefit plan liabilities

 

(99)

 

 

1,255 

Taxes on changes in pension and other postretirement benefit plan liability

adjustments, net of foreign currency exchange rate changes

 

(132)

 

 

(693)

Pension and other postretirement benefit plan adjustments, net of tax

 

211 

 

 

1,259 

Total comprehensive earnings

$

23,007 

 

$

32,685 



See accompanying Notes to Condensed Consolidated Financial Statements

3

 


 

WOODWARD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share amounts)

(Unaudited)









 

 

 

 

 



 

 

 

 

 



December 31,

 

September 30,



2017

 

2017

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

85,779 

 

$

87,552 

Accounts receivable, less allowance for uncollectible amounts of $3,793 and $3,776, respectively

 

331,438 

 

 

402,182 

Inventories

 

503,523 

 

 

473,505 

Income taxes receivable

 

18,842 

 

 

19,376 

Other current assets

 

39,660 

 

 

38,574 

Total current assets

 

979,242 

 

 

1,021,189 

Property, plant and equipment, net

 

930,158 

 

 

922,043 

Goodwill

 

556,759 

 

 

556,545 

Intangible assets, net

 

165,633 

 

 

171,882 

Deferred income tax assets

 

20,473 

 

 

19,950 

Other assets

 

72,909 

 

 

65,500 

Total assets

$

2,725,174 

 

$

2,757,109 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Short-term borrowings

$

66,300 

 

$

32,600 

Accounts payable

 

182,144 

 

 

232,788 

Income taxes payable

 

5,891 

 

 

6,774 

Accrued liabilities

 

98,785 

 

 

155,072 

Total current liabilities

 

353,120 

 

 

427,234 

Long-term debt, less current portion

 

583,339 

 

 

580,286 

Deferred income tax liabilities

 

21,901 

 

 

33,408 

Other liabilities

 

366,268 

 

 

344,798 

Total liabilities

 

1,324,628 

 

 

1,385,726 

Commitments and contingencies (Note 20)

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

Preferred stock, par value $0.003 per share, 10,000 shares authorized, no shares issued

 

 -

 

 

 -

Common stock, par value $0.001455 per share, 150,000 shares authorized, 72,960 shares issued

 

106 

 

 

106 

Additional paid-in capital

 

176,473 

 

 

163,836 

Accumulated other comprehensive losses

 

(48,439)

 

 

(53,186)

Deferred compensation

 

8,173 

 

 

7,135 

Retained earnings

 

1,830,872 

 

 

1,820,268 



 

1,967,185 

 

 

1,938,159 

Treasury stock at cost, 11,706  shares and 11,739 shares, respectively

 

(558,466)

 

 

(559,641)

Treasury stock held for deferred compensation, at cost, 200 shares and 186 shares, respectively

 

(8,173)

 

 

(7,135)

Total stockholders' equity

 

1,400,546 

 

 

1,371,383 

Total liabilities and stockholders' equity

$

2,725,174 

 

$

2,757,109 



 

 

 

 

 



See accompanying Notes to Condensed Consolidated Financial Statements.

4

 


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)











 

 

 

 

 



 

 

 

 

 



Three-Months Ended December 31,



2017

 

2016

Cash flows from operating activities:

 

 

 

 

 

Net earnings

$

18,260 

 

$

46,548 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

21,070 

 

 

18,913 

Gain due to curtailment of postretirement plan

 

(330)

 

 

 -

Net gain on sales of assets

 

(58)

 

 

(3,699)

Stock-based compensation

 

12,423 

 

 

1,261 

Deferred income taxes

 

(11,681)

 

 

4,777 

Gain on derivatives reclassified from accumulated comprehensive earnings into earnings

 

(18)

 

 

(18)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

72,714 

 

 

87,615 

Inventories

 

(28,796)

 

 

(37,632)

Accounts payable and accrued liabilities

 

(104,150)

 

 

(54,563)

Income taxes

 

25,597 

 

 

(5,731)

Retirement benefit obligations

 

(673)

 

 

(897)

Other

 

(6,891)

 

 

(4,223)

Net cash (used in) provided by operating activities

 

(2,533)

 

 

52,351 

Cash flows from investing activities:

 

 

 

 

 

Payments for purchase of property, plant, and equipment

 

(28,450)

 

 

(21,058)

Proceeds from sale of assets

 

132 

 

 

3,682 

Proceeds from sales of short-term investments

 

 -

 

 

758 

Payments for purchases of short-term investments

 

(791)

 

 

 -

Net cash used in investing activities

 

(29,109)

 

 

(16,618)

Cash flows from financing activities:

 

 

 

 

 

Cash dividends paid

 

(7,656)

 

 

(6,779)

Proceeds from sales of treasury stock

 

1,389 

 

 

4,843 

Payments for repurchases of common stock

 

 -

 

 

(24,004)

Borrowings on revolving lines of credit and short-term borrowings

 

458,950 

 

 

316,650 

Payments on revolving lines of credit and short-term borrowings

 

(425,250)

 

 

(312,800)

Payments of long-term debt and capital lease obligations

 

(106)

 

 

(102)

Net cash provided by (used in) financing activities

 

27,327 

 

 

(22,192)

Effect of exchange rate changes on cash and cash equivalents

 

2,542 

 

 

(13,746)

Net change in cash and cash equivalents

 

(1,773)

 

 

(205)

Cash and cash equivalents at beginning of year

 

87,552 

 

 

81,090 

Cash and cash equivalents at end of period

$

85,779 

 

$

80,885 



 

 

 

 

 



See accompanying Notes to Condensed Consolidated Financial Statements

 

5

 


 

WOODWARD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Number of shares

 

Stockholders' equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive (loss) earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

Preferred
stock

 

Common
stock

 

Treasury
stock

 

Treasury
stock held for
deferred
compensation

 

Common
stock

 

Additional
 paid-in
capital

 

Foreign
currency
translation
adjustments

 

Unrealized
derivative
gains
(losses)

 

Minimum
retirement
benefit
liability
adjustments

 

Total
accumulated
other
comprehensive
(loss) earnings

 

Deferred compensation

 

Retained
earnings

 

Treasury
 stock at
cost

 

Treasury
stock held for
deferred
compensation

 

Total
 stockholders'
equity



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2016

 

 -

 

72,960 

 

(11,374)

 

(157)

 

$

106 

 

$

141,570 

 

$

(25,971)

 

$

179 

 

$

(39,913)

 

$

(65,705)

 

$

5,089 

 

$

1,649,506

 

$

(512,882)

 

$

(5,089)

 

$

1,212,595 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

46,548 

 

 

 -

 

 

 -

 

 

46,548 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

(15,111)

 

 

(11)

 

 

1,259 

 

 

(13,863)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(13,863)

Cash dividends paid ($0.110 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(6,779)

 

 

 -

 

 

 -

 

 

(6,779)

Purchases of treasury stock

 

 -

 

 -

 

(350)

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(24,004)

 

 

 -

 

 

(24,004)

Sales of treasury stock

   

 -

 

 -

 

139 

 

 -

 

 

 -

 

 

(907)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

5,750 

 

 

 -

 

 

4,843 

Common shares issued from treasury stock to settle employee liabilities

 

 -

 

 -

 

26 

 

(26)

 

 

 -

 

 

740 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,767 

 

 

 -

 

 

1,027 

 

 

(1,767)

 

 

1,767 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

1,261 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,261 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

37 

 

 

 -

 

 

 -

 

 

(37)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(4)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of December 31, 2016

 

 -

 

72,960 

 

(11,559)

 

(183)

 

$

106 

 

$

142,664 

 

$

(41,082)

 

$

168 

 

$

(38,654)

 

$

(79,568)

 

$

6,889 

 

$

1,689,275

 

$

(530,109)

 

$

(6,889)

 

$

1,222,368 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances as of October 1, 2017

 

 -

 

72,960 

 

(11,739)

 

(186)

 

$

106 

 

$

163,836 

 

$

(27,280)

 

$

135 

 

$

(26,041)

 

$

(53,186)

 

$

7,135 

 

$

1,820,268

 

$

(559,641)

 

$

(7,135)

 

$

1,371,383 

Net earnings

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

18,260 

 

 

 -

 

 

 -

 

 

18,260 

Other comprehensive income (loss), net of tax

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

4,547 

 

 

(11)

 

 

211 

 

 

4,747 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

4,747 

Cash dividends paid ($0.125 per share)

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(7,656)

 

 

 -

 

 

 -

 

 

(7,656)

Sales of treasury stock

 

 -

 

 -

 

33 

 

 -

 

 

 -

 

 

214 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,175 

 

 

 -

 

 

1,389 

Stock-based compensation

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

12,423 

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

12,423 

Purchases and transfers of stock by/to deferred compensation plan

 

 -

 

 -

 

 -

 

(14)

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

1,041 

 

 

 -

 

 

 -

 

 

(1,041)

 

 

 -

Distribution of stock from deferred compensation plan

 

 -

 

 -

 

 -

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

 -

 

 

(3)

 

 

 -

 

 

 -

 

 

 

 

 -

Balances as of December 31, 2017

 

 -

 

72,960 

 

(11,706)

 

(200)

 

$

106 

 

$

176,473 

 

$

(22,733)

 

$

124 

 

$

(25,830)

 

$

(48,439)

 

$

8,173 

 

$

1,830,872

 

$

(558,466)

 

$

(8,173)

 

$

1,400,546 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 





See accompanying Notes to Condensed Consolidated Financial Statements

6

 


 



WOODWARD, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share amounts)

(Unaudited)



Note 1.  Basis of presentation

The Condensed Consolidated Financial Statements of Woodward, Inc. (“Woodward” or the “Company”) as of December 31, 2017 and for the three months ended December  31, 2017 and December  31, 2016, included herein, have not been audited by an independent registered public accounting firm.  These Condensed Consolidated Financial Statements reflect all normal recurring adjustments that, in the opinion of management, are necessary to present fairly Woodward’s financial position as of December  31, 2017, and the statements of earnings, comprehensive earnings, cash flows, and changes in stockholders’ equity for the periods presented herein.  The results of operations for the three months ended December  31, 2017 are not necessarily indicative of the operating results to be expected for other interim periods or for the full fiscal year.  Dollar and share amounts contained in these Condensed Consolidated Financial Statements are in thousands, except per share amounts.

The Condensed Consolidated Financial Statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations.

These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and Notes thereto included in Woodward’s most recent Annual Report on Form 10-K filed with the SEC and other financial information filed with the SEC.

Management is required to use estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the reported revenues and expenses recognized during the reporting period, and certain financial statement disclosures, in the preparation of the Condensed Consolidated Financial Statements included herein.  Significant estimates in these Condensed Consolidated Financial Statements include allowances for uncollectible amounts, net realizable value of inventories, customer rebates earned and payable, warranty reserves, useful lives of property and identifiable intangible assets, the evaluation of impairments of property, the provision for income tax and related valuation reserves, assumptions used in the determination of the funded status and annual expense of pension and postretirement employee benefit plans, the valuation of stock compensation instruments granted to employees and board members, and contingencies.  Actual results could vary from Woodward’s estimates.

As disclosed in Note 1, Operations and summary of significant accounting policies in the Notes to the Consolidated Financial Statements in Part II, Item 8 of Woodward’s most recent Annual Report on Form 10-K, the amortization of intangible assets has been reclassified from a separate line in the condensed consolidated statement of earnings for the three-months ended December 31, 2016 to an allocated expense/cost component of cost of goods sold and selling, general and administrative expenses based on the nature of the intangible asset that is being amortized.  The reclassification of these amounts conforms to the current period presentation.

Note 2.  New accounting standards

From time to time, the Financial Accounting Standards Board (“FASB”) or other standards setting bodies issue new accounting pronouncements.  Updates to the FASB Accounting Standards Codification (“ASC”) are communicated through issuance of an Accounting Standards Update (“ASU”).

In August 2017, the FASB issued ASU 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities.”  ASU 2017-12 is intended to more closely align the financial statement reporting of hedging relationships with the economic results of an entity’s risk management activities and to make certain targeted improvements to simplify the application of hedge accounting guidance in current U.S. GAAP.  ASU 2017-12 is also intended to increase standardization of financial statement disclosures including requiring a tabular disclosure of the income statement effects of fair value and cash flow hedges.  Woodward early  adopted the new guidance in the first quarter of fiscal year 2018The application of the new guidance did not have any impact on Woodward’s current hedging arrangements or on the disclosures related to such arrangements.

In March 2017, the FASB issued ASU 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.”  ASU 2017-07 requires that the service cost component of net periodic benefit costs from defined benefit and other postretirement benefit plans be included

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in the same statement of earnings captions as other compensation costs arising from services rendered by the covered employees during the period.  The other components of net benefit cost will be presented in the statement of earnings separately from service costs.  ASU 2017-07 is effective for fiscal years beginning after December 31, 2017 (fiscal year 2019 for Woodward).  Following adoption, only service costs will be eligible for capitalization into manufactured inventories, which should reduce diversity in practice.  The amendments of ASU 2017-07 should be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit costs from defined benefit and other postretirement benefit plans in the statement of earnings and prospectively, on and after the effective date, for the capitalization of the service cost component into manufactured inventories.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adopt the new guidance in fiscal year 2019, and expects changes to earnings before income taxes to be insignificant in the year of adoption.

In October 2016, the FASB issued ASU 2016-16, “Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other than Inventory.”  ASU 2016-16 eliminates the current U.S. GAAP exception deferring the tax effects of intercompany asset transfers (other than inventory) until the transferred asset is sold to a third party or otherwise recovered through use.  After adoption of ASU 2016-16, Woodward will recognize the tax consequences of intercompany asset transfers in the buyer’s and seller’s tax jurisdictions when the transfer occurs, even though the pre-tax effects of these transactions are eliminated in consolidation.  ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted as of the beginning of Woodward’s fiscal year 2018.  Woodward will adopt the new guidance in fiscal year 2019.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  Woodward has not determined in which period it will adopt the new guidance.  Woodward currently anticipates the adoption of ASU 2016-16 will result in balance sheet reclassifications, but based on Woodward’s current transactional activity, such adjustments are not expected to be significant.

In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments.”  ASU 2016-13 adds a current expected credit loss (“CECL”) impairment model to U.S. GAAP that is based on expected losses rather than incurred losses.  Modified retrospective adoption is required with any cumulative-effect adjustment recorded to retained earnings as of the beginning of the period of adoption.  ASU 2016-13 is effective for fiscal years beginning after December 15, 2019 (fiscal year 2021 for Woodward), including interim periods within the year of adoption.  Early adoption is permitted for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within those fiscal years.  Woodward has not determined in which period it will adopt the new guidance but does not expect the application of the CECL impairment model to have a significant impact on Woodward’s allowance for uncollectible amounts for accounts receivable and notes receivable from municipalities.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842).”  The purpose of ASU 2016-02 is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.  In addition, ASU 2016-02 modifies the definition of a lease to clarify that an arrangement contains a lease when such arrangement conveys the right to control the use of an identified asset.  ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (fiscal year 2020 for Woodward), including interim periods within the year of adoption.  In transition, Woodward will be required to recognize and measure leases beginning in the earliest period presented using a modified retrospective approach; therefore, Woodward anticipates restating its Consolidated Financial Statements for the two fiscal years prior to the year of adoption.  However, during December 2017, the FASB proposed amending ASU 2016-02 such that restatement of fiscal years 2018 and 2019 would not be required upon adoption.  Although early adoption is permitted, Woodward expects to adopt the new guidance in fiscal year 2020 and is currently assessing the impact this guidance may have on its Consolidated Financial Statements, including which of its existing lease arrangements will be impacted by the new guidance and whether other arrangements not currently classified as leases may become subject to the guidance of ASU 2016-02.  Rent expense for all operating leases in fiscal year 2017, none of which was recognized on the balance sheet, was $8,302.  As of September 30, 2017, future minimum rental payments required under operating leases, none of which were recognized on the balance sheet, were $23,215.

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” and has subsequently issued several supplemental and/or clarifying ASUs (collectively “ASC 606”).  ASC 606 prescribes a single common revenue standard that replaces most existing U.S. GAAP revenue recognition guidance.  ASC 606 outlines a five-step model, under which Woodward will recognize revenue as performance obligations within a customer contract are satisfied.  ASC 606 is intended to provide more consistent interpretation and application of the principles outlined in the standard across filers in multiple industries and within the same industries compared to current practices, which should improve comparability.  Adoption of ASC 606 is required for annual reporting periods beginning after December 15, 2017 (fiscal year 2019 for Woodward), including interim periods within the reporting period.  Woodward has determined it will elect to adopt using the cumulative effect transition method with the cumulative effect of initial adoption recognized at the date of initial application.    

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Further, under the cumulative effect transition method, Woodward will disclose the impact of changes to financial statement line items as a result of applying ASC 606 (rather than previous U.S. GAAP) and include an explanation of the reasons for significant changes.

Woodward is currently assessing the impact that the future adoption of ASC 606 may have on its Consolidated Financial Statements by analyzing its current portfolio of customer contracts, including a review of historical accounting policies and practices to identify potential differences in applying the guidance of ASC 606.  Woodward is also performing a comprehensive review of its current processes and systems to determine and implement changes required to support the adoption of ASC 606 on October 1, 2018, the first day of Woodward’s fiscal year 2019.  As part of this review process, Woodward is implementing new software solutions to support revenue reporting after adoption.  

Based on Woodward’s review of its customer contracts, Woodward has determined that revenue on the majority of its customer contracts will continue to be recognized at a point in time, generally upon shipment of products, consistent with Woodward’s current revenue recognition model.  Upon adoption of ASC 606, however, Woodward also believes some of its revenues from sales of products and services to customers will be recognized over time, rather than at a point in time, due primarily to the terms of certain customer contracts.  As a result of recognizing some revenue over time, various balance sheet line items will be impacted.  As such, Woodward believes the adoption of ASC 606 will have an impact on both the timing of revenue recognition and various line items within the Consolidated Balance Sheet.

Woodward generally expenses costs as incurred for the engineering and development of new products.  Customer funding received for such engineering and development efforts is currently recognized as revenue when earned, with the corresponding costs recognized as cost of sales. ASC 606 requires customer funding of product engineering and development to be deferred and recognized as revenue as the related products are delivered to the customer.  ASC 606 also requires product engineering and development costs to be capitalized as contract fulfillment costs, to the extent recoverable from the deferred customer funding, and subsequently amortized as the related products are delivered to the customer.  Therefore, under ASC 606, Woodward expects to record both contract assets and contract liabilities related to such funded engineering and development efforts, which are expected to become material over time.  Recognized revenues and research and development costs are both expected to decrease in the year of adoption and for at least several years thereafter, due to the recognition of these contract assets and liabilities.  However, recognition of these contract assets and liabilities are expected to have an immaterial impact on pre-tax earnings in future periods.

In addition, ASC 606 will require more comprehensive disclosures about revenue streams and contracts with customers, including significant judgments required.  Woodward is currently implementing changes to its processes for preparing required disclosures and to information systems that support the financial reporting process. 

Woodward is also evaluating implications to the Company’s system of internal controls, relative to revenue recognition and the related revenue disclosures, which are based on the criteria outlined in the Committee of Sponsoring Organizations of the Treadway Commission’s 2013 Internal Control – Integrated Framework.

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Note 3.  Earnings per share

Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted-average number of shares of common stock outstanding for the period.

Diluted earnings per share reflects the weighted-average number of shares outstanding after consideration of the dilutive effect of stock options and restricted stock.

The following is a reconciliation of net earnings to basic earnings per share and diluted earnings per share:







 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Numerator:

 

 

 

 

 

 

Net earnings 

 

$

18,260 

 

$

46,548 

Denominator:

 

 

 

 

 

 

Basic shares outstanding

 

 

61,246 

 

 

61,559 

Dilutive effect of stock options and restricted stock

 

 

2,463 

 

 

2,112 

Diluted shares outstanding

 

 

63,709 

 

 

63,671 

Income per common share:

 

 

 

 

 

 

Basic earnings per share

 

$

0.30 

 

$

0.76 

Diluted earnings per share

 

$

0.29 

 

$

0.73 

The following stock option grants were outstanding during the three-months ended December 31, 2017 and 2016, but were excluded from the computation of diluted earnings per share because their inclusion would have been anti-dilutive.





 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Options

 

 

754 

 

 

 -

Weighted-average option price

 

$

78.75 

 

$

n/a

The weighted-average shares of common stock outstanding for basic and diluted earnings per share included the weighted-average treasury stock shares held for deferred compensation obligations of the following:



 

 

 

 

 

 



 

 

 

 

 

 



 

Three-Months Ended



 

December 31,



 

2017

 

2016

Weighted-average treasury stock shares held for

deferred compensation obligations

 

 

193 

 

 

170 



Note 4.  Joint venture

On January 4, 2016, Woodward and General Electric Company (“GE”), acting through its GE Aviation business unit, consummated the formation of a strategic joint venture between Woodward and GE (the “JV”) to design, develop and source fuel systems for specified existing and all future GE commercial aircraft engines that produce thrust in excess of fifty thousand pounds.

As part of the JV formation, Woodward contributed to the JV certain contractual rights and intellectual property applicable to the existing GE commercial aircraft engine programs within the scope of the JV.  Woodward had no initial cost basis in the JV because Woodward had no cost basis in the contractual rights and intellectual property contributed to the JV.  GE purchased from Woodward a 50% ownership interest in the JV for a $250,000 cash payment to Woodward.  In addition, GE will pay contingent consideration to Woodward consisting of fifteen annual payments of $4,894 per year which began on January 4, 2017, subject to certain claw-back conditions.  Woodward records annual payments received as deferred income and includes them in Net cash provided by operating activities under the caption “Other” on the Condensed Consolidated Statement of Cash Flows.  Neither Woodward nor GE contributed any tangible assets to the JV.

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Woodward determined that the JV formation was not the culmination of an earnings event because Woodward has significant performance obligations to support the future operations of the JV.  Therefore, Woodward recorded the $250,000 consideration received from GE, in January of 2016, for its purchase of a 50% equity interest in the JV as deferred income.  The $250,000 deferred income will be recognized as an increase to net sales in proportion to revenue realized on sales of applicable fuel systems within the scope of the JV in a particular period as a percentage of total revenue expected to be realized by Woodward over the estimated remaining lives of the underlying commercial aircraft engine programs assigned to the JV.  Unamortized deferred income recorded in connection with the JV formation included accrued liabilities of $6,439 as of December 31, 2017 and $6,451 as of September 30, 2017, and other liabilities of $235,855 as of December 31, 2017 and $236,896 as of September 30, 2017.  Amortization of the deferred income recognized as an increase to sales was $1,053 for the three-months ended December 31, 2017, and $1,496 for the three-months ended December  31, 2016.

Woodward and GE jointly manage the JV and any significant decisions and/or actions of the JV require the mutual consent of both parties.  Neither Woodward nor GE has a controlling financial interest in the JV, but both Woodward and GE do have the ability to significantly influence the operating and financial decisions of the JV.  Therefore, Woodward is accounting for its 50% ownership interest in the JV using the equity method of accounting.  The JV is a related party to Woodward.  Other income includes income of $596 for the three-months ended December  31, 2017, and income of $684 for the three-months ended December  31, 2016 related to Woodward’s equity interest in the earnings of the JV.  Woodward received no cash distributions from the JV in the three-months ended December  31,  2017 or 2016.  Woodward’s net investment in the JV, which is included in other assets, was $6,868 as of December  31, 2017 and $6,272 as of September 30, 2017.  

Woodward’s net sales include $12,975 for the three-months ended December 31, 2017 of sales to the JV, compared to $15,302 for the three-months ended December  31, 2016.  Woodward recorded a reduction to sales of $5,408 for the three-months ended December  31, 2017 related to royalties paid to the JV by Woodward on sales by Woodward directly to third party aftermarket customers, compared to $5,403 for the three-months ended December  31, 2016.  The Condensed Consolidated Balance Sheets include “Accounts receivable” of $6,728 at December 31, 2017, and $8,554 at September 30, 2017, related to amounts the JV owed Woodward, and include “Accounts payable” of $3,984 at December 31, 2017, and $6,741 at September 30, 2017, related to amounts Woodward owed the JV.

Note 5.  Financial instruments and fair value measurements

Financial assets and liabilities recorded at fair value in the Condensed Consolidated Balance Sheets are categorized based upon a fair value hierarchy established by U.S. GAAP, which prioritizes the inputs used to measure fair value into the following levels:

Level 1: Inputs based on quoted market prices in active markets for identical assets or liabilities at the measurement date.

Level 2: Quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable and can be corroborated by observable market data.

Level 3: Inputs that reflect management’s best estimates and assumptions of what market participants would use in pricing the asset or liability at the measurement date.  The inputs are unobservable in the market and significant to the valuation of the instruments.

The table below presents information about Woodward’s financial assets that are measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation techniques Woodward utilized to determine such fair value.  Woodward had no financial liabilities required to be measured at fair value on a recurring basis as of December 31, 2017 or September 30, 2017.







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

At December 31, 2017

 

At September 30, 2017



 

Level 1

 

Level 2

 

Level 3

 

Total

 

Level 1

 

Level 2

 

Level 3

 

Total

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$

77,411 

 

$

 -

 

$

 -

 

$

77,411 

 

$

79,822 

 

$

 -

 

$

 -

 

$

79,822 

Investments in reverse repurchase agreements

 

 

847 

 

 

 -

 

 

 -

 

 

847 

 

 

 

 

 -

 

 

 -

 

 

Investments in term deposits with foreign banks

 

 

7,521 

 

 

 -

 

 

 -

 

 

7,521 

 

 

7,729 

 

 

 -

 

 

 -

 

 

7,729 

Equity securities

 

 

19,133 

 

 

 -

 

 

 -

 

 

19,133 

 

 

16,600 

 

 

 -

 

 

 -

 

 

16,600 

Total financial assets

 

$

104,912 

 

$

 -

 

$

 -

 

$

104,912 

 

$

104,152 

 

$

 -

 

$

 -

 

$

104,152 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Investments in reverse repurchase agreements:  Woodward sometimes invests excess cash in reverse repurchase agreements.  Under the terms of Woodward’s reverse repurchase agreements, Woodward purchases an interest in a pool of securities and is granted a security interest in those securities by the counterparty to the reverse repurchase agreement.  At an agreed upon date, generally the next business day, the counterparty repurchases Woodward’s interest in the pool of securities at a price equal to what Woodward paid to the counterparty plus a rate of return determined daily per the terms of the reverse repurchase agreement.  Woodward believes that the investments in these reverse repurchase agreements are with creditworthy financial institutions and that the funds invested are highly liquid.  The investments in reverse repurchase agreements are reported at fair value, with realized gains from interest income recognized in earnings, and are included in “Cash and cash equivalents.”  Since the investments are generally overnight, the carrying value is considered to be equal to the fair value as the amount is deemed to be a cash deposit with no risk of change in value as of the end of each fiscal quarter.

Investments in term deposits with foreign banks: Woodward’s foreign subsidiaries sometimes invest excess cash in various highly liquid financial instruments that Woodward believes are with creditworthy financial institutions.  Such investments are reported in “Cash and cash equivalents” at fair value, with realized gains from interest income recognized in earnings.  The carrying value of Woodward’s investments in term deposits with foreign banks are considered equal to the fair value given the highly liquid nature of the investments.

Equity securities: Woodward holds marketable equity securities, through investments in various mutual funds, related to its deferred compensation program.  Based on Woodward’s intentions regarding these instruments, marketable equity securities are classified as trading securities.  The trading securities are reported at fair value, with realized gains and losses recognized in “Other (income) expense, net.”  The trading securities are included in “Other assets.”  The fair values of Woodward’s trading securities are based on the quoted market prices for the net asset value of the various mutual funds.

Accounts receivable, accounts payable, and short-term borrowings are not remeasured to fair value, as the carrying cost of each approximates its respective fair value.  The estimated fair values and carrying costs of other financial instruments that are not required to be remeasured at fair value in the Condensed Consolidated Balance Sheets were as follows:









 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

At December 31, 2017

 

At September 30, 2017



 

Fair Value Hierarchy Level

 

Estimated Fair Value

 

Carrying Cost

 

Estimated Fair Value

 

Carrying Cost

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from municipalities

 

2

 

$

14,771